Q4 2022 Newmark Group Inc Earnings Call
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Yes.
Greetings welcome to Newmark Group incorporated sports fourth quarter 2022 financial results.
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A question and answer session will follow the formal presentation.
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At this time I will now turn the conference over to Jason Mcgruder head of Investor Relations.
Mr. Mcgruder, you may now begin.
Thank you operator, good morning, Jim.
Nu Mark issued its fourth quarter 2022 financial results press release and presentation summarizing these.
Our results this morning.
<unk> provided on today's call compare only the three months ended December 31, 2022, with the year earlier period, unless otherwise stated.
We'll also be referring to results on this call only on a non-GAAP basis, unless otherwise stated.
non-GAAP terms include adjusted earnings and adjusted EBITDA. Please see the section in today's press release for the complete annual updated definitions of any non-GAAP terms reconciliations of these items to the corresponding GAAP results.
When and why management uses.
More information with respect to our GAAP and non-GAAP results.
It's available on our website and today's press release and supplemental tables in our quarterly results financial crisis or the quarterly results presentation.
Unless otherwise stated any figures with respect to cash flow from operations discussed on today's call refer to net cash provided by operating activities, excluding loan origination and sale.
Also exclude the impact of the 2021 equity Matt.
Cash from the business at the same cash flow metric, excluding employee loans or producers.
Discuss on today's call assumes no additional share repurchases material acquisitions or meaningful changes in the company's stock price our expectations are subject to change based on various macroeconomic social political or other factors.
25, or other long term financial operational targets do assume acquisitions. They are also subject to change for these same reasons, none of our long term targets or goals should be considered formal guidance.
I also remind you.
That information on this call about our business that are not historical facts are forward looking statements within the meaning of section 27 Avian Securities Act at 933 as amended and section 21 E of the Securities Exchange Act of Nike 34, as amended such statements involve risks and uncertainties, except as required by law Newmark undertakes no obligation to update.
Any forward looking statements for complete discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward looking statements see Newmark Securities and exchange Commission filings, including but not limited to the risk factors set forth in our most recent Form 10-K, and Q4 8-K, which are incorporated by reference I'm now happy to turn.
On the call over to our host Barry <unk>, Chief Executive Officer of Newmark Group, Inc.
Good morning, and thank you for joining US with me today are new marks Chief Financial Officer, Microsoft Bali, Our Chief revenue Officer, Lou Alvarado, and our Chief strategy Officer, Jeff Day.
For the past decade, Newmark has strive to become the company with the greatest talent in the industry.
Our near term objectives include becoming number one in capital markets in the United States.
Yesterday, we took a major step towards this goal by adding the industry's top capital markets team led by Doug Harmon and Adam <unk>, who are based in New York, the largest real estate market in the world.
We have an incredible combination of the top strategist and advisers together with extraordinary local expertise.
This is led to over a decade of strong growth and are becoming a top commercial real estate services platform in the U S.
During the fourth quarter interest rates rose at the fastest pace in over 30 years.
This led to challenging market conditions, but also has created an opportunity for new mark to solidify its position as the platform of choice for the real estate industry is top professionals.
We believe the current market dislocation coupled with our strong financial position is creating opportunities for us to hire top talent and acquire companies at attractive valuations.
As we have seen with past downturns and subsequent recoveries capital markets leaves the rebound once the markets and a better aligned we expect.
To drive significantly higher industry volumes.
Historically, our investment sales and debt businesses have had a multiplier effect, which drives outside outsized growth across newmar.
We expect our market share revenues and earnings to materially outperform the industry.
While the macroeconomic environment may be challenging in the short term, we remain excited about our market position and our future.
Our professionals are actively assisting clients as they navigate the current environment restructure their portfolios and redesign their workplaces and on the Investor side, we are advising our clients on equity recapitalization debt financing and Repurposing underutilized properties, including conversion into multifamily.
Life Science industrial and other users.
We also expect the growing demand for hybrid work environments to create opportunities for our consulting and our flexible workspace business.
As an example, we recently arranged the sale and financing of 25 water Street, a $1 1 million square foot conversion to multifamily and office office building in New York City. This transaction represents one of the largest ever conversions in the United States.
The long term fundamentals of commercial real estate remains strong we closed end funds alone, having approximately $436 billion of global capital waiting to be deployed.
More than two and a half trillion dollars of U S commercial and multifamily debt maturing over the next five years and the continuing secular trend towards outsourcing of real estate services to companies like Newmar with that I'm happy to turn the call over to Mike.
Thank you Barry and good morning.
Our total revenues were $607 $3 million down.
Down 38, 3% due to lower industry wide transaction activity, particularly in capital markets, where U S investment sales were down 62% and that originations were down 54%.
In leasing industrial and retail were bright spots, surpassing pre pandemic levels for the year. However office remains challenging with Costar reporting a 20% decline in U S office leasing activity during the fourth quarter.
Total expenses of $497 1 million or 31% lower largely due to the variable nature of our expenses.
We are ahead of schedule with respect to our $50 million annualized fixed cost savings target and expect to realize at least $35 million during 2023.
Turning to earnings.
Our fourth quarter results compared to record fourth quarter, 2021 earnings, creating a difficult year over year comparison.
Adjusted EBITDA was $102 $2 million compared with $225 $4 million.
This result, largely reflects the dramatic rise in interest rates on our higher margin capital markets business.
Our EPS was <unk> 32.
Compared with 65.
We repurchased one 7 million shares at an average of $8 per share and reduced our weighted average share count to $236 3 million shares down seven 1%.
Our fully diluted share count is now slightly below year end 2017.
Over the past two years, we have returned $792 million to shareholders through share repurchases and redemptions.
In addition, we have returned $38 $8 million in dividends and after tax distributions.
We expect to continue returning capital to shareholders, although our near term rate of share repurchases will decline.
This is due to the current market dislocation, which is providing us with high quality opportunities to hire the industry's best talent and acquire companies at attractive valuations.
Moving to the balance sheet.
We ended the year with $233 million of cash and cash equivalents.
The change in cash from a year earlier.
<unk> cash flows from operations was $261 $5 million in proceeds from the sale of our remaining NASDAQ shares.
Offset by $294 $8 million of share repurchases.
Cash used for acquisitions of $64 $2 million and normal movements in working capital.
Yeah.
We remain in a strong financial position with net leverage at <unk> six times.
Our cash and cash equivalents expected cash flow generation and $600 million revolving credit line.
Provides us with over $1 billion of available capital.
Turning to 2023 guidance.
We expect total revenues of between two five and $2 $7 billion compared with 2 billion $705 $5 million.
We anticipate solid fee growth across our suite of management services and loan servicing businesses.
This guidance also reflects reduced U S transaction volumes in the first half of 2023 and improvements thereafter.
We anticipate adjusted EBITDA of between 425 and $510 million versus $510 $7 million.
Okay.
We expect the tax rate for adjusted earnings between 14, and 17% and weighted average share count to be flat to down 1%.
Okay.
You will also note that we included guidance for the first quarter of 2023, and our press release.
While we do not normally provide quarterly guidance. We thought it was important to include this information given the macroeconomic conditions, which are expected to dampen industry volumes through the first half of 2023.
And with that I would like to open the call up for questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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One moment. Please we poll for questions once again Thats star one.
Okay.
Thank you and our first question today comes from the line of Chi.
Let's try it with Goldman Sachs. Please proceed with your question.
Hi, Good morning. Thank you for taking my question very helpful on the guidance and in the first quarter guidance as well, but could you perhaps talk a little bit about how do you think different segments of the business would perform as you think about the overall growth of the new guidance, especially if there's a way to parse out first half and the SEC.
Dolphin and help us understand what kind of recovery are you embedding in the back half for leasing and for capital markets.
Sure I think we talked a little bit about this last quarter and we'd actually put a hypothetical model into our earnings materials.
And if you notice the the guidance we gave for 2023 as you know a little bit better than that hypothetical model.
Certainly we still continue to believe our management business will grow.
<unk> in the low to mid teens.
And our transactional businesses.
Certainly down but less down for the leasing business.
And more down for the capital markets business investment sales in particular.
See our guidance for the first quarter.
As is down we would expect that each of these businesses would incrementally improve as we go through the year.
The third and fourth quarter being a bit stronger as interest rates sort of settle at.
And transaction activity comes back in the capital markets World.
Okay.
Very helpful. Thank you and I'd like to pivot a little bit to the hirings that you've made recently so you know you've obviously.
<unk> just moments ago that you know you you expect to pull back a little bit on share repurchases at least compared to 2022 as you focus on hiring and acquisitions potentially given the opportunity in those items.
What are the gaps that are left to be filled as you think about you know building a very strong muscle within capital markets and.
How do you think about sort of you know within within the brokerage business. How do you think about our different segments or geographies help us understand that please.
So the fundamental foundation of our business is built around talent the best talent.
In every sector and every vertical and every geography so.
So we have we have work to do and we have white space in many places, but it now becomes.
The more talent that we bring on board the more we elevate our brand the more top professionals want to be here.
It helps us everywhere in all not just capital markets, but it helps in leasing.
The follow on business due to two fantastic.
And gifted professionals is on capital markets. There is leasing agencies that follow there's property management that follows their servicing business that follows Theres project management that follows all that it all has a multiplier effect and the same thing goes in and the tenant rep and the multimarket tenant Rep business, if you hire great people.
All you do great things and all of the other businesses that we build around it will be better.
That that may be more recurring revenue because we have visibility.
And and an opportunity to penetrate deeper into the markets that those opportunities exist because of our capital markets and because of our delivering great tenants and the many things that we do which is provided by the underlying foundation of the business is getting a talent premium.
That we expect and Thats that is really the plan.
Thank you I'll stick with two question rule.
Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your questions.
Hey.
Good morning, good morning, Barry.
And definitely are quite the headline that you guys made last night after the close.
Uh huh.
The first question is sort of continuing on that.
Obviously, I'm sure that Adam and Doug don't come cheap.
But you know I know that you are building for the long term you've done a very good job building out across.
You're also a public company, so you're sort of balancing the long term benefits to the new market and a platform of building up into different verticals versus you know you're a public company and obviously right now in the current environment, we all know that.
Not a great time, but obviously next year forward people expect paybacks, so when someone sees the headline Nevada, Doug coming on board.
How do they think about the payback on that is it sort of a normal trajectory or will this take longer to earn a return that we will see to the bottom line just because of you know whatever the cost of hiring was.
But as we underwrite every acquisition to be profitable and to get us. The return that we bet. Our desired returns. So there's a lot of mythology out there people don't move for money.
That's not because it's even anywhere cause any firm would hire great talent, if they could get the great talent, but when you build a foundation like we built.
We actually were certainly more attractive.
For them. So I think everything we do is about being creative on its own.
But it also gets it gives us the ability to attract other talent for less money because this is where they want to be because the money upfront is not why people move it just isn't.
And then the second question Barry as you know, we just went through an incredible decade of transaction activity compressing cap rates Street retail trading at Crazy prices clearly, we're now experiencing higher interest rates and re pricing of certain asset classes.
Based on your 10 year over the you know over your years decades.
Real estate market.
How do you envision the next transaction cycle debate do you think it will be sort of what we had before maybe just give us some perspective, because a lot of us have only know compressing cap rates and lower and lower interest rates versus higher interest rates and changing capital markets. There maybe some perspective on what you think.
Recovery will look like.
I've been through five cycles. What's interesting is we found what we found out in the pandemic, which if you look back at our performance and in 19, we use this strategy of hiring great talent.
And we built up our multi and we were that the market was relatively good and then in the pandemic cycles are more knowable than a pandemic.
We like everybody were put on our heels a little bit in understanding how deep. This is what this is it.
How long will it last so we we didn't hire.
And what we found is in when the when the pandemic were sided and people are back to work.
We crushed it.
All of those all of those investments in 19 paid off in Spades, we came out like a bat out of Hell. So what we realized is that you know you you have to keep hiring talent growing the talent base it will be beneficial to the platform and we will outperform the market now here we are.
In what way more knowable as the cycle, yes, there are nuances to every cycle.
Fat induced cycles or supply demand cycles, there's a host of things the dotcom bubble cycle in 2000 and the.
The RTC Bank crisis in 90 are they all have a different taste of different.
Are there different makeup, but we know that the one thing that all cycles have in common is they end.
And in.
In this case the cycle. We begin begins so it's sort of a reset.
If cap rates go up 300 basis points to two to 300 basis points interest rates go up 300 basis points.
That we're in the business as an intermediary prices reset people sell property and then it starts over again there are other things that impact the purchasing of of of assets.
Inflation will never go away, so where you have a supply demand constrained market.
You build new product, it's more expensive. So you need a better return you need higher rents and so rents always over the long period of time continue to go up so in even in a market that gets reset it's not only cap rate compression, it's supply demand its mobility and low.
Whether it's a low tax state attracting lots of new population.
There's always things that impact demand and cycles, and you know where we're in a good place at the moment transactions are down at the moment, we generally do larger transactions, which are impacted more greatly by oh that frees up in.
In the market. So so we're you know we're at we're incredibly encouraged to continue leaning.
Leaning forward and doing what we've done because we know it's going to yield a better result.
Thank you Barry.
Okay.
The next question comes from the line of Jade Rahmani with VW. Please proceed with your questions.
Thank you very much they're starting to be a few signs of improving.
Liquidity in the markets not sure how sustainable it is but I'm wondering on your side.
You know from some of your top clients and the largest most institutional clients are you seeing any green shoots are you seeing any improvement in town.
Okay.
Hey, Jay just Jeff.
We actually just in the last 30 days or so.
Investors increasingly active.
Just one anecdote, we added property on the market in Texas.
88 car T cell line, we add 33 offers 15 best in finals. So the first step here, obviously is people willing to engage in transactions. The property did sell for less than the owner wanted to sell it for but we are starting to see people interested in transacting in.
Where the price point is which is a better place than where we were at the end of the quarter.
Yeah. Thank you very much go ahead.
Hey, Jay this is Lou.
On the office industrial and retail sector.
<unk> seen more activity as far as.
People engaging them understand a lot of be obese right. We're really trying to understand where the market is in order to position themselves and determine what's the best timing for them to go there is definitely going to be activity as we see the fed slow down people are getting more comfortable as to where things are going to be so that they can make these decisions.
Hit the market.
Preparing at this time.
Thank you very much the target to be the number one capital markets.
Yeah.
Company in the space do you need large deals to come back to make that happen can you just talk to the scope of the business maybe give some color around how it's stratified by deal size. When we look at someone like them like a CBRE. They're also very big in the large deal space So too.
I'll take them did you need the large transactions to come back.
But we will we will play in the in the private clients smaller deals where we are we have a strategy for that I think when you do the big deals it's much more attractive for even the private client guys that do smaller deals. So so smaller so where we're gonna play up and down.
The levels of transaction, but.
But when you if you start with the big in ink and create the foundation and you elevate the brand. It's good good on all sides, but we fully expect to do small deals as well. It's also you know the affordable and smaller deals in the multi space is also a good place to be as well so.
Will be it will be in all sides of that.
Thank you.
Okay.
Thank you.
To ask a question. Please press star one from your telephone keypad.
Next question comes from the line of Patrick O'shaughnessy with Raymond James. Please proceed with your questions.
Hey, good morning, maybe a question for Jeff, Jeff The Gse's did not lend.
Lend up to their caps in 2022 do you have a sense for why that was the case and as you look to 2023 do you think they'll get closer to the caps.
Yes.
Yes.
The gse's have seen.
And evolution.
Which is increasingly focused on what they call their Michigan business, which is the affordable business.
Hello.
Targeted affordable et cetera.
And so as they are measured in as FHFA has changed other affordability as measures, which used to be by units, but now its by percentage of production.
Pressure to hit their caps every year is not the same as it was historically.
So what I would expect us to see a slight shift.
Which we already saw last year towards a greater focus on affordability and we would expect them to be slightly counter cyclical so that as other debt capital sources are out of the market. The GSE has filled the gap when that capital is plentiful and we would expect the GSC to back off a little.
And that's what we saw last year, so as it relates to this year, particularly with interest rates I would expect them to fill the gaps and I would expect them to be somewhere close to their caps.
Yeah.
Great. That's helpful. Thank you.
And then Barry you indicated that brokers don't move to new Mark because of the upfront signing bonus does that imply that you're offering the same upfront cashes, where they're leaving.
Or kind of what are the implications of that statement.
Yeah.
We we are we don't offer any more money than anybody else.
And in some places has to offer more because of the nature of the platform.
So.
We don't believe people choose new mark because of the money.
Got it and then maybe just a.
Go ahead.
I was gonna add remember.
We use a combination of cash and equity in our equity.
As for for the board at the end than we.
We have long term contracts that we signed with our top producers so.
The way we do it.
There's a little bit differentiate it a little bit better than the market and it builds our brand over a long period of time.
Got it that's helpful and then maybe an adjacent follow up to that.
You indicated market dislocations do kind of tend to.
Stimulate some attractive hiring opportunities.
Why is that the case is it just people become less satisfied with their existing employer in dislocated market situations or what what kind of caused them to maybe look for greener pastures.
I don't know that it makes them more than happy with their existing usually that exists prior but when you are immersed in a very active market, it's very hard to.
Pick your head up and take the time to make a move.
And when it's when there is a slowdown.
It is a it's a moment in time when.
People can make a move.
And that's.
That's that usually occurs in a in a time like this one.
There is more space between transactions.
Got it thank you.
That's a little while so I think a lot of people are also look and say look as the market is going to recover.
What do I want my teammates to be so I can capture more market share and make more money over the period of the contract and that's when they look and say well, where do I really want to be and who do I really want to be partnering with in order.
The more successful and that's one of the things that we do we make people better we make people have higher production than they had where they were before and that's really why they look to join us.
When there are when these times are like this are happening.
Makes sense. Thank you.
Our next question is a follow up from the line of Jade Rahmani with K B W. Please proceed with your questions.
Thank you very much just a few technical questions as a result of the Cushman hires do you expect a material.
Will increase in the share count and when would we start seeing that.
So I think we guided our share count to be flat to down 1%.
423 compared to 22.
Obviously, we've considered all things we know about today so.
We won't be changing guidance based on that fact.
Thank you on the adjusted tax rate it looked like it came in pretty low for the fourth quarter, what drove that and what's the driver of the low tax rate on an adjusted basis for 2023.
It's actually really simple.
<unk> earnings.
So our stock compensation.
Which is tax deductible for the company.
Came in roughly around the 7% to 9% range that we guided to actually a little bit below for 2022.
But on lower earnings that just drives our tax rate down a bit.
So we came in around 17% for 'twenty, two we're guiding 2014% to 17% based on the guidance range for 'twenty three.
What do you expect.
For stock based compensation for 2023.
It's within the same range of 7% to 9% of our commission revenues.
So I think it came in around $120 million for 2022.
You can you can do the math it will be roughly in that range, maybe a little bit more a little bit less but.
Materially different.
And Commissioner Bowl revenues basically we should take investment sales capital markets, we should exclude MSR gains and then should we also exclude management services.
Yeah, the only part of management services that falls into that as the evaluation of business.
Because they are on a commission basis.
Other than that its leasing its capital markets, which is sales in that.
As you said without the illness our evaluation.
Okay, and then is there employee loan amortization expense running through the P&L.
Yes. It is.
It's running through GAAP and non-GAAP .
It is already reflected in our numbers.
What's the magnitude of that.
I'm not sure we've disclosed that but maybe as we prepare the 10-K, we will we'll take a look and see if it's in there where if we can add something that'll be helpful to you.
Okay.
Alright, great. Thanks, so much.
Thank you.
Thank you we've reached the end of the question and answer session and then I'll now turn the call over to Mr. Barry Gossan, Chief Executive Officer for closing remarks.
Thank you all for joining us today I am extremely excited about the company's future and look forward to updating you on the next quarterly call. So thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Okay.